Vietnam’s Star Is Dimming

By William Pesek -
May 9, 2013

Like other would-be tiger economies,
Vietnam faces a trifecta of new threats: a crisis-paralyzed
Europe, a faltering America, and a newly spendthrift Japan. Yet
the biggest risk to the nation’s future may be old-fashioned
nostalgia.

It has been 27 years since Hanoi launched the “Doi Moi”
reforms that allowed privately owned companies to participate in
the economy and opened key sectors, such as agriculture. The
rapid growth that followed propelled Vietnam toward the realm of
middle-income nations, transforming the onetime war zone into a
case study for development and poverty reduction. Now, though,
Vietnam’s 1986 blueprint for a “socialist-oriented market
economy” is looking dated.

Recent data show the strategy that got Vietnam this far --
a China-like heavy reliance on state-owned enterprises and top-down planning -- is now holding the nation back. Vietnam is
losing ground on global competitiveness league tables while
growth has slowed to about 5 percent, the lowest rate since
1999. To recover, the country needs to do precisely what it has
avoided doing thus far: build a truly vibrant and innovative
private sector that can diversify growth and create prosperity.

No Guarantees

“A complete recalibration of the economy would be
necessary to achieve stronger growth again,” says Vaninder
Singh, a Singapore-based economist at Royal Bank of Scotland
Group Plc. “This is not guaranteed as it will require a
significant change in the corporate structure and improvements
in productivity.”

Does Prime Minister Nguyen Tan Dung’s government have the
political will to modernize Vietnam’s $124 billion economy? The
International Monetary Fund appears to have its doubts. The IMF
recently cut its 2014 Vietnam forecast by more than it did for
any other Asian country, to 5.2 percent. That may sound grand in
a world in which Group of Seven nations are barely expanding.
But for a 90-million-person economy at Vietnam’s stage of
development, it’s nothing short of a crisis.

When they launched their reforms, leaders in Hanoi believed
they were following a Chinese model that had already worked
wonders. The Vietnamese approach was more gradualist and
cautious than Deng Xiaoping’s. Still, the broad thrust was
similar and has now begun to breed the same problems.

China Lite

Like China, Vietnam is suffering from a distorted credit
allocation system dominated by state-owned companies. Their
reckless lending decisions have fueled dangerous property
bubbles and buried banks under nonperforming loans. The gap
between rich and poor is growing rapidly; so are tensions
between workers seeking higher wages and industries built on
cheap labor. Dodgy land seizures and privatizations that enrich
only the politically connected have sparked public outrage.
Rampant corruption is undermining the ruling party’s legitimacy.

The country cannot move forward without restructuring
state-owned enterprises, which account for almost 40 percent of
gross domestic product. Economists at McKinsey & Co., for
example, estimate that Vietnam must boost labor productivity by
more than 50 percent to maintain healthy growth. You don’t need
a Nobel Memorial Prize in Economic Sciences to know that only a
thriving private sector can do that.

Reason for Worry

In February, Deputy Finance Minister Truong Chi Trung
promised that the government would unveil a plan to overhaul 52
state-owned groups by June. Yet based on past experience,
there’s ample reason to believe that the reforms will lack
specifics or teeth. This government has already missed a target
to create an asset-management company to address bad debt in
banks. Pledges to rein in runaway public investments, lending
and state-owned enterprises aren’t just familiar -- they are
becoming downright monotonous.

The question is whether Dung’s team can credibly implement
any of these desperately needed improvements, never mind all
three. Here, one shouldn’t downplay the role of corruption. Just
like Xi Jinping in Beijing, Dung faces a uniquely un-communistic
problem: too many party bigwigs getting rich from Vietnam’s
current model. Those spoils deaden the impetus for change.

Graft has risen in inverse proportion to the economy’s
standing. In Transparency International’s 2012 Corruption
Perceptions Index, Vietnam fell to 123rd place out of 176
nations from 112th place in 2011, a worse standing than Sierra
Leone and Belarus. Meanwhile, on the World Economic Forum’s
latest Global Competitive Index, Vietnam fell 10 places to 75th,
lagging behind Uruguay and Ukraine.

Looking Forward

Vietnam’s challenge is in some ways more manageable than
China’s: Its state-owned companies are smaller, its vested
interests less pervasive and powerful. But gradualism is no
longer an option. It’s time for the country to develop its own
model, one that roots out corruption, invests more in education
and key growth sectors such as technology manufacturing, and
empowers businesses to move up the value-added ladder.

For years, other small Southeast Asian nations, such as
Myanmar and Cambodia, have looked to Vietnam for ideas on how to
reform their own economies. The country can become that kind of
role model again. It just needs to look forward, not back.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)